CONTROLLED FOREIGN COMPANIES: ACCEPTABLE DISTRIBUTION POLICY (Hansard, 15 July 1987)

§ Mr. Brooke
It may be helpful if I say a brief word about clause 65. The present position is that, under the controlled foreign company legislation, tax may be charged on the accumulated profits of an overseas company, but if the controlled foreign company pays an adequate dividend to its United Kingdom shareholders, tax will be chargeable on it. That is seen as meeting the requirements of the legislation. When the acceptable distribution test is satisfied, there is no charge on the controlled foreign company's profits. The clear intention of exclusion from the charge when an approved foreign company pursues an acceptable distribution policy is that dividends should be subject to United Kingdom tax.
However, attempts have been made to sidestep that, for tax purposes, by moving the residence of the overseas company to the United Kingdom before a dividend is paid. Thus, at the time it is paid, a dividend is not charged tax as a dividend received from an overseas company, but escapes tax as a dividend paid by one United Kingdom resident company to another. The device can be repeated, for example, by transferring most of the overseas company's assets to another tax haven company before changing its residence.
If necessary, existing cases will be challenged in the courts. However, since significant amounts of tax could be 1193 at risk, we have decided to take immediate action to restore the clear intention of the original provisions. The amendments that are contained in the clause ensure, therefore, that, whenever a CFC pays a dividend to pursue an acceptable distribution policy, there should he a charge to tax on the appropriate United Kingdom resident shareholder.
The increased yield from this measure that is given in the FSBR is £10 million for 1987–88 and 1988–89. That figure relates only to the handful of cases in which we know that the device has been used. The Exchequer yield in the form of tax on dividends that are paid by CFCs to meet the acceptable distribution test, is estimated at £60 million per annum. A significant amount of that tax—up to £40 million—could be at risk if the device were to be widely exploited. That is why we have introduced this clause.

§ Mr. Blair
This section is not to be retrospective but prospective. I wondered why that was, in view of the earlier comments. I had not appreciated that we were talking about such large sums of money.

§ Mr. Brooke
As I said, if necessary, existing cases will be challenged in the courts, and the amounts of money to which I referred are those that we know. It is because there is a much larger sum of money at risk, quite apart from the cases to which I referred, that we are introducing the clause.